Until recently Angela Merkel was viewed as the naive and colourless newcomer on the international stage. She was the inexperienced leader of whom nobody expected much.

Now she is preparing to make her mark on history. As she gears up to host the G8 summit of industrial leaders in Heiligendamm next month, she does so fully aware that it is her chance to establish herself as the world's most respected and powerful stateswoman.

As current president of the European Union, Merkel, 53, a former physicist from east Germany, has already won praise for her no-nonsense way of doing business - she even takes it on herself to rearrange the seating at meetings if leaders are not seeing eye to eye; and, if she is brought fizzy water when she had asked for still, stirs the bubbles out with her pen rather than make a fuss.

But when she meets seven other world leaders in June she will be able to show what she is made of. Compromise, rather than confrontation, is Merkel's style. Which is why she bowed to Tony Blair's wishes to put development aid and Africa on the agenda. In return, she in her firm way will try to keep the agenda tightly focused on economic issues.

Her methodical, scientist's approach to problem-solving (find a solution and work your way back) has won her admirers. Not least President George Bush who, to her alarm, gave her an affectionate back rub at last year's G8 in St Petersburg, and has declared: 'I listen to Angela... She has got a lot of wisdom.'

But while her leanings towards consensus might have won Merkel great praise on the international scene - her attempts to bring about a ceasefire in Lebanon, her leadership of the EU and attempts to revive the constitutional treaty, as well as her criticism of Bush on CIA renditions and Guantanamo Bay - on the domestic front the fruits of her leadership are less obvious.

Merkel's grand coalition of her Christian Democrats and the Social Democrats of Kurt Beck is bogged down in ideological rows about childcare, health reform, inheritance tax and the minimum wage. The topics are far from petty but are being fought out in a tedious and narrow-minded way.

Recently, however, even on the home front, Merkel's star has started to shine again. She is enjoying popularity ratings of 70 per cent - making her Germany's most popular politician. With the announcement on 1 May that unemployment has been driven to a five-year low and a healthy growth rate of 2 to 3 per cent is expected this year in a country which until recently was referred to as the 'sick man of Europe', it is probably fair to put Merkel's standing down to one thing: the economy. She now feels vindicated in her most controversial decision yet to introduce the biggest sales tax rise since the Second World War. Yet her government is as unpopular as she is popular. More than 70 per cent of Germans say the coalition is too obsessed with itself rather than with Germany's problems. For some time, cracks have been showing in the coalition and it is disputable whether it will see out its full term until 2009.

In which case, Merkel might do well to do what she has done best until now in her attempt to avoid political quicksands on the home front - and focus instead on her role as a foreign policy Chancellor. Soon she will have the welcome excuse of helping shape Europe's new constellation - Nicolas Sarkozy, Gordon Brown and Merkel - a trio of European pragmatists. Sarkozy and Brown will welcome the fact that they are not dealing with a European romanticist, like some of her predecessors. This is the woman who has said that the best German attribute is making 'nice sealed windows'.

When the Berlin Wall was collapsing, Merkel was sitting in the sauna with a girlfriend - a weekly routine from which she was not going to be diverted. In March, when she held the EU's 50th birthday party in Berlin, she gathered Europe's leaders at the German historical museum, close to where she had once lived in an east German squat. 'My border ended a few metres from here,' she told her guests, in a moving reference to the Berlin Wall.

In that statement lies a lot about what Merkel is about - the Hamburg-born girl who moved to communist East Germany to her parents as a baby, spending her first 35 years living under a dictatorship. Over time she has slowly revealed more and more of her personal biography, which for most Germans is unimaginable but which has taught her about the values of democracy. Recently the woman who still prepares breakfast for her publicity-shy husband, Joachim Sauer, 58, a quantum chemist, revealed that she never did get the Trabant car for which she had been on a 12-year waiting list in communist Germany.

The Wall fell before she could take delivery of the cardboard-panelled gas-guzzler. Instead she and Sauer bought a VW Golf and have stayed true to it ever since. 'We have moved on a bit since,' she recently told a gathering in Berlin. 'We now have 100 horse power and air conditioning.'

She appears, in short, to be endearingly indifferent to the glamour of her new role. 'I am immune to the seduction of power,' she said after becoming Chancellor in November 2005 and putting a portrait of her heroine Catherine the Great in place of a large brass bull sculpture inherited in the chancellery from her more confrontational predecessor, Gerhard Schroeder .

So far her seemingly aloof statement seems to have been borne out. Her aim, she said, was to put Germany back on its feet again, at the same time as trying to carry on living a normal life 'cooking potato soup and plum cake'. So far, so good. Germany is on the mend, Merkel still cooks and shops.

She has worked on softening her image, improving the cut of both her hair and her suits, but all attempts to compare her with Margaret Thatcher have failed. For one, she has never been seen with a handbag. Often accused of lacking warmth, in a recent interview she admitted: 'I've now learnt to use the smiley!' - which might have been a reference to the fact that she does indeed smile more since being Chancellor. But she meant her discovery of the happy-face symbol which she often inserts into the scores of text messages she sends every day.

'It's very efficient and practical,' she said, 'because it allows you to differentiate between jokes and the bitter truth.'